Standing Committee A

[Sir John Butterfill in the Chair]

Finance Bill

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39) - Clause 206 - Persons liable to charge

Amendment made: No. 435, in 
clause 206, page 173, line 19, leave out subsection (5).—[Ruth Kelly.]
 Clause 206, as amended, ordered to stand part of the Bill.

Clause 207 - Individual's lifetime allowance and standard lifetime allowance

George Osborne: I beg to move amendment No. 415, in
clause 207, page 173, leave out line 29 and insert— 
 '(2) The standard lifetime allowance is, for the tax year— 
 (a) 2006–07, £1,500,000 
 (b) 2007–08, £1,600,000 
 (c) 2008–09, £1,650,000 
 (d) 2009–10, £1,750,000 
 (e) 2010–11, £1,800,000 
 together in each case with an amount equal to relevant valuation factor (see section 263) multiplied by the additional pension (if any) that the member would have been entitled to receive at pensionable age (calculated in accordance with Part 1 of Schedule 4 to the Pensions Act 1995) if he or she had not been in contracted-out employment (as defined in section 8 of the Pension Schemes Act 1993) at any time.'.

John Butterfill: With this it will be convenient to discuss the following amendments:
 No. 373, in 
schedule 34, page 466, line 28, leave out '£1,500,000 ('.
 No. 374, in 
schedule 34, page 466, line 29, leave out ')' and insert '(see section 207)'.
 No. 375, in 
schedule 34, page 466, line 39, leave out '£1,500,000 ('.
 No. 376, in 
schedule 34, page 466, line 40, leave out ')' and insert '(see section 207)'.
 No. 387, in 
schedule 34, page 473, line 12, leave out '£1,500,000 ('.
 No. 388, in 
schedule 34, page 473, line 13, leave out ')' and insert '(see section 207)'.

George Osborne: Good morning to you, Sir John, and to the Committee. This clause, one of the most important and contentious in the Bill, sets an individual's lifetime allowance for tax-free pension
 funding. Because of the way in which we conduct business in Committee, one is always in a bit of a dilemma over whether to wait for a clause stand part debate on the principle of a clause—in this case, the principle of a lifetime allowance—or to have the debate at the beginning, on the amendments, bearing in mind the Chairman's guidance. If it is all right with you, Sir John, I would prefer to have the debate now, because it would seem rather strange to discuss the amendments before the bulk of the clause.
 As stated in subsection (2), the clause sets the lifetime allowance for the year 2006–07—the first year in which the Bill will apply—at £1.5 million. However, the clause does not say much else. It does not, for example, say what the figure will be in subsequent years. The figures are set out only in the explanatory notes, and one of the amendments to which I shall speak seeks to incorporate them in the Bill. 
 The clause does not say how the Inland Revenue will increase the lifetime allowance or whether it will rise in line with prices, earnings or anything else. It merely states that the Treasury will announce the sum every year and that it will not be less than that for the previous year. 
 To return to a familiar debate from our previous sitting, the clause makes no distinction between those with defined benefit schemes and those with defined contribution schemes, even though, as I explained, a lifetime allowance of £1.5 million means that someone with a defined benefit scheme can have a pension of £75,000, while the pension of someone with a defined contribution scheme is likely to be £20,000 lower. The clause also makes no distinction between those who have contracted out of the state second pension and those who have not. In effect, contracting out erodes one's lifetime allowance, and I shall come to an amendment on that issue. 
 Although the clause does none of those things, it nevertheless represents a huge climbdown by the Treasury. When the concept of the lifetime allowance was set out in the original consultation document, the amount was set at £1.4 million. The Government said that that was broadly the capital equivalent of the sum required to provide a maximum capped pension under the current tax regime for a man aged 60 who was drawing an indexed pension and providing a spouse's pension. They said, of course, that no more than 5,000 people would be adversely affected and that the number would increase by about 1,000 people a year. Of all the things that have been mentioned in connection with pensions legislation, the £1.4 million limit has been the most contentious. It was the thing that the industry was most upset about. The National Association of Pension Funds said that 
''we have urged the Inland Revenue to remove the proposed £1.4 million lifetime limit, which threatens to alienate company executives from occupational pension schemes for which they are responsible. The numbers potentially affected are likely to be far higher than the 5,000 suggested by the Government and compliance monitoring could prevent the benefits of simplification from being fully realised. Capping tax free cash and annual payments into pensions are all that is needed.''
 The Chancellor of the Exchequer does not like to be told that he has got things wrong and does not often apologise; in fact, I do not think that he has ever 
 apologised. Instead, he dug in his heels in the second consultation document, which was published in December 2003, despite receiving all those complaints and evidence from the industry that he, or the people working for him, had got the sums wrong. However, he slipped out a significant concession in that document which would reduce the number of people affected. I am talking about the 20 to 1 valuation factor. I imagine that the concession was partly an attempt to take the steam out of the argument about the £1.4 million limit. 
 The Chancellor then asked the National Audit Office to confirm that he had been right all along and hinted rather darkly that the whole package could be abandoned if the industry did not agree on this issue. The problem with asking the NAO a question—I say this as someone who served on the Public Accounts Committee, along with the Financial Secretary, who is still a member, although she does not attend particularly regularly—is that we cannot be sure that we will get the answer that we like. The Chancellor found that out to his cost, because the NAO discovered that the Treasury was not just wrong in its forecast, but 100 per cent. wrong. The NAO came to the conclusion that 10,000 people were likely to be affected when the lifetime allowance came in, which is double the Treasury's estimate of 5,000. 
 I am sure that most of the excited Labour members of the Committee read the NAO report as basic preparation and will need no reminder of what it said. However, some of them look as though they have not done their homework, so I had better remind them. The report stated that 
''the Inland Revenue undertook some credibility checks against alternative sources of evidence, but they did not undertake sensitivity analysis and so did not have a range of possible values.
Using alternative assumptions that seem more likely to be tailored to the attributes of high earners drove the estimate of the number affected upwards, compared to the average assumptions made in the original estimates.''
 The NAO pointed to other evidence that was consistent with an estimate of 10,000 people being affected. 
 The NAO was even more critical, in its rather dry way, of the estimate that only 1,000 additional people would be affected in each future year. It stated: 
''Even greater uncertainty attaches to the projections into the future which makes it even harder to provide a reliable estimate of the number likely to be affected . . .
The evidential base for the estimate of 1,000 additional people a year with funds exceeding the allowance is thin and based on a number of assumptions and roundings which significantly affect the outcome.''
 That was its verdict on the way that the Inland Revenue did its sums. 
 The £1.4 million limit would have a particular impact on those in certain professions, such as members of the judiciary and airline pilots. Manchester airport's second runway is in my constituency, and I represent quite a number of airline pilots who live in the constituency. One of them, a Captain Roberto De Martino—[Laughter.] 
 I am surprised that the hon. Member for Rhondda (Chris Bryant), who I thought was such a good European, sniggers at a non-English name. Anyway, Captain De Martino wrote to me, not because I have this job in the Committee considering the Finance Bill, but because I am his constituency MP. He stated: 
''The Government suggests that only 5,000 will be affected on 'A' Day (6th April 2005) and about 1,000 per year thereafter. This would suggest that the measure only affects a small number of the very rich and therefore is of no concern to most pension savers . . .
I am an airline pilot, as are many of your constituents . . . I have been saving for my pension since the age of 21, and will be retiring in another 13 years. I have been saving prudently and with foresight for my own and my family's future yet I will now be affected by this legislation.''
 He went on: 
''I am writing to alert you to this unfair measure, which penalises the prudent saver, whilst still protecting the pension funds of the super wealthy (the supposed real targets of Gordon Brown's proposals) . . . The tax avoidance industry is already advising the super wealthy on loopholes and their silence is deafening as they look forward to more fee income from those about to be swept up by these proposals. Whereas professional employees who are above average income earnings, such as myself my fellow pilots, doctors, senior managers, head teachers and directors, to name a few; who already pay full PAYE and are currently shouldering a large part of this Government's increased tax burden, will find themselves most affected in their retirement.''
 It is important that members of the Committee understand that we are talking not just about the super-wealthy, who, in any case, will find alternative ways of saving for their retirement if they are caught by the lifetime allowance. 
 Why did the Inland Revenue get its sums so wrong? It is partly because the methodology was wrong. The NAO picked up on that. It was critical of several things; for example, the Government used the family resources survey as evidence in calculating the allowance, but the survey sample included only 100 people who earn more than £100,000, so it was not of great use in calculating the effect of such measures on high earners. 
 Another reason is the secretive way in which the Government drew up the proposals. It goes without saying that they did not consult the Department for Work and Pensions. We have long been used to the fact that the Treasury does not tell the DWP anything. However, it did not even consult the Government Actuary's Department. I have with me two extraordinary letters: one is to my hon. Friend the Member for Havant (Mr. Willetts), and the other is to you, Sir John. I know that you were aware that I was to mention the letter, as I sought your permission to do so. The letters are in the public domain, and GAD—which, by the way, is a Government Department—has confirmed that it is happy for the letters to be used. 
 The letter from the chief Government Actuary, Chris Daykin, to my hon. Friend the Member for Havant, the shadow Secretary of State for Work and Pensions, states: 
''I would like to be absolutely clear that GAD was not involved in any way in advising on the figure of £1.4 million. Indeed I think it is safe to say that GAD was not asked to advise at all on the original Inland Revenue proposals, although we have offered our views to the Revenue during the consultation period.
I should be obliged therefore if you could ensure that GAD is not blamed for having calculated (or miscalculated) the figure of £1.4 million!''
 That is a letter from a Government Department. 
 The letter from Grant Ballantine of GAD to you, Sir John, with which you of course are familiar but members of the Committee may not be, states that 
''the Inland Revenue did not consult the Government Actuary's Department about the lifetime limit (either on its substance or on the detailed calculations which may have been made to determine the actual quantum of the limit) . . .
We in GAD have a number of concerns about the proposals, particularly in terms of equity between different types of pension provision and fairness between different members of the population (e.g. according to their age at retirement). On the basis of the slightly revised December 2003 Inland Revenue simplification paper which was published yesterday,''—
 this was in December 2003— 
''it would appear that the Inland Revenue have given no weight to any of the points we made. (Indeed, they appear to have given very little weight to any comments from consultees, since the proposals do not appear to be changed in any matter of substance)''.
 Mr. Ballantine goes on to say: 
''My own personal views on the proposed lifetime limit of £1.4 million are very much in tune with your views. I believe the imposition of the lifetime limit, particularly at the proposed 'low' level of £1.4 million, will be counterproductive—encouraging a reduction in the level of pension provision (contrary to the Government's stated aim of more private provision) and resulting in more complexity, particularly at the implementation stage (contrary to the Government's stated aim of simplification)''.
 In the years I have been involved in politics, both in this place and as a special adviser in the previous Conservative Government, I have not come across a case of a public letter from a Government Department being so critical of what the Government are proposing. They are both extraordinary letters, and I am grateful for your indulgence, Sir John, in allowing me to read them out. 
 Faced with the evidence from the NAO, the Chancellor of the Exchequer had no real choice but to back down. In the Budget, he announced that he would not dig his heels in any more and the lifetime allowance would be increased from £1.4 million to £1.5 million; indeed, he set out some pretty generous increases for the years up to 2011.

Rob Marris: Does that not suggest to the hon. Gentleman that, contrary to the assertion made in the letter from Grant Ballantine to you, Sir John, the Chancellor had in fact listened to some of the proposals put forward during the consultation?

George Osborne: I am afraid that I do not agree with the hon. Gentleman. During the period of consultation with the industry, the Inland Revenue did not listen or change its proposals between the first and second consultation documents. It did not involve the Government Actuary at any stage, as that Department made clear to members of the Opposition. It then commissioned the NAO report, which contradicted the Chancellor, and faced with that he had little option but to back down.

Howard Flight: I am not certain that this is the case, but I was
 advised by a member of the Inland Revenue committee that the committee proposed a £2 million limit so that the existing cap was comfortably covered, and that it was indeed the Chancellor who cut back that amount to £1.4 million.

George Osborne: My hon. Friend has better information than I, but it would not surprise me to learn that the good officials of the Inland Revenue had got this issue right all along, and that it was the Chancellor of the Exchequer who overruled them and was then forced to back down. Of course, when he backed down in his Budget speech, there was not a word to say that this was anything other than what he had been planning all along, that he had changed his mind, that he had listened to the NAO or anyone else—it was announced as if he had always planned to take this path.
 The Chancellor announced that the lifetime allowance would increase for each of the four years after A-day, which is in 2006, to £1.8 million, and that there would be a quinquennial review of the figure. However, neither the increases after A-day nor the review are provided for in the Bill; nor, I think, is the proposal in the December 2003 consultation document that the lifetime allowance should be uprated annually by the retail prices index. We will come back to that in the next group of amendments, but it is worth noting that a proposal in the consultation document is not repeated in the Bill. 
 My amendment deals with all those points, but before coming to them, I pray your indulgence, Sir John, in commenting on the new £1.5 million figure, and questioning the need for a lifetime allowance at all. The Government concede that, even with the new figure of £1.5 million, up to 1,000 people could still be hit. Will the Financial Secretary confirm that? I do not know what the latest Treasury estimates are. PricewaterhouseCoopers submitted a memorandum to the Treasury Committee's inquiry into this year's Budget, in which it said: 
''The whole basis of the 'pot limit' remains of concern, however. One can understand why there has to be a limit on tax-assistance for pensions savings but by imposing this on the accumulated fund, it does create uncertainty because of the interaction of future factors such as investment performance, work plans and salary growth. Even if the Treasury's figure of 1,000 people a year affected by this limit is correct, many more will worry about their position.''
 Indeed, in a letter to you, Sir John, as trustee of the MPs' pension scheme, GAD suggested that several MPs may also be affected. PricewaterhouseCoopers pointed out that many more than 1,000 people may be affected. Rowena Marsh, a partner at Grant Thornton, the firm of accountants, said that the limit might be all right for the average earner, but it is extremely low for a number of mid-range executives. 
 PricewaterhouseCoopers makes it clear that the lifetime allowance also penalises good investment decisions, because if a pension pot is invested in shares that do very well, a person can be taken over their lifetime allowance thanks to their own good investment decisions. There is a curious and perverse incentive in the very concept of a lifetime allowance. 
 The result of all that may be that many highly paid executives are encouraged to make their own 
 arrangements for their retirement, and they will no doubt use many of the opportunities afforded to them in, for example, schedule 34, which we will discuss later. They may leave company schemes altogether and will therefore have a less direct incentive to keep an eye on those schemes and ensure that they remain generous. 
 The Government had alternatives. They could have scrapped the concept of a lifetime allowance and relied on, say, a restriction on capping tax-free cash and on the annual payment allowance, which is what the NAPF suggested. They could have used the United States model of tax relief for occupational pensions based on one simple condition; it does not have a limit, and every member of the company is allowed to join the scheme and enjoy the same benefits. In other words, everyone from the boardroom to the shop floor has access to the same scheme on exactly the same terms. 
 Interestingly, in a letter to the Financial Times last year, the chairman of the CBI pensions strategy group said: 
''One solution would be for the Treasury to remove the cap for those companies that can demonstrate that senior executives belong to the same pension scheme as other employees. This, at a stroke, would encourage unity and provide equity.''
 Many of us in this place would have welcomed that, because we are concerned about two-tier provision in companies whose pension schemes do not apply throughout and where the people at the top often have more generous schemes than those towards the bottom. However, the Government have chosen not to do that, so, as I said, more and more companies are likely to have different schemes for those in the boardroom and those on the shop floor. This is a missed opportunity. 
 Amendment No. 415 is the most important one in the group; the others are consequential. The amendment seeks to achieve two things: first, to write into the Bill the Government's promised increases in the lifetime allowance over four years after A-day. That is £1.6 million for the year 2007–08, rising to £1.65 million, £1.75 million and £1.8 million by 2010–11. As I said, it is set out at the beginning of the explanatory notes, but it is not included in the Bill. The Bill contains no mechanism for increasing the lifetime allowance with any certainty but merely a requirement that the Treasury state each year what the lifetime allowance will be. Will the Financial Secretary explain why it is not in the Bill? 
 While the hon. Lady is doing that, will she answer a question that struck me last night? Why does the figure increase by £1 million in the first year, £500,000 in the second year, £1 million in the third and then by another £500,000? Why is it not an even increase each year, perhaps of £750,000? The annual allowance increases by the same amount each year—it increases by £10,000 for each of the first four years—but the increase in the lifetime allowance is strangely lumpy. Will the Financial Secretary explain why? That important information will need to be digested by people in the pensions industry. Surely it would be 
 better if the necessary information was available in one place rather than people having to turn to the explanatory notes to find out what the increase will be in the four years after A-day. 
 Important though my previous comments were, amendment No. 415 tries to achieve something more substantive. As currently devised, the lifetime allowance discriminates against those who have contracted out of the second state pension. That is because state pension benefits are not included in the lifetime allowance. However, private pension benefits, including those paid for by contracted-out rebates, are included. In other words, contracting out erodes a person's lifetime allowance. 
 The paragraph at the end of the amendment would add into the lifetime allowance the additional state pension that the member would have received had he not been contracted out. Subsequent clauses provide, in a number of circumstances, for the Government to allow the lifetime allowance to increase, or, in effect, to disregard things such as overseas income. Why is that not done for people who have contracted out of the second state pension? Why are they being penalised? Is it a deliberate Government policy to encourage people not to contract out of the second state pension, or is it an unintended and unforeseen consequence of the pensions legislation? 
Several hon. Members rose—

John Butterfill: Order. As correspondence between me and the deputy Government Actuary has been quoted, I wish to clarify the situation. That correspondence arose in the course of my duties as chairman of the trustees of the parliamentary contributory pension fund. It was later used by me in a debate on pensions, but that was some considerable time ago, and only after I had clarified with the Government Actuary that he was happy for it to be in the public domain. The hon. Member for Tatton (Mr. Osborne) consulted me to establish that it was indeed in the public domain before using it in today's debate. That, of course, happened long before I knew that I would be chairing this Committee.

David Laws: Thank you and good morning, Sir John. With your permission, I shall make a few comments on the stand-part element of the debate. However, I start by saying that the Liberal Democrats agree with the amendment moved by the hon. Member for Tatton, which seeks to write into the Bill a number of Government undertakings.
 The hon. Gentleman highlighted effectively some of the apparent tensions in the Government—and, perhaps, in the Treasury—over the level of the lifetime allowance. We, too, enjoyed seeing the Government's embarrassment over the fact that they had essentially ended up with a marginal rate of 55 per cent., especially as they had criticised our proposal for a marginal rate of 50 per cent. We now think that the overall level that the Government have set for the lifetime limit is a reasonable compromise. We are therefore happy that that is not unfair to the relatively small number of taxpayers involved, particularly as there are already advantages in the tax system that favour people on higher incomes, as we discussed the 
 other day. Having elements in the tax system to neutralise those excessive advantages may not be a bad thing. 
 If there is a criticism to be made of the lifetime allowance, it is the criticism that the hon. Gentleman made. Is the lifetime allowance limit the right approach and will it lead to various anomalies, uncertainty and interesting decisions, based on incentives, about investing in high risk versus low risk assets? It is worth saying that we are talking about only a relatively small number of people. The hon. Gentleman pointed out that the estimated number of people whom the proposals would affect had increased by 100 per cent. However, notwithstanding that, we are still talking about a relatively small number, of about 10,000 in the country, which is perhaps 10 or 15 per constituency. The hon. Gentleman has done well to track down one of those people in his constituency. I have yet to meet any in mine, but his constituency is perhaps more affluent than mine. The point is worth making, because we criticised the Government over the extent to which tax advantages in the system have been consolidated and even extended.

George Osborne: First, 10,000 is quite a lot of people and, secondly, we regularly deal with clauses that target far fewer people.

David Laws: I am grateful for that point. I did not suggest that we should never debate clauses that affect only 10,000 people. However, in the light of both the overall tax advantages in the system and the Government's compromise, the proposal on the lifetime allowance seems reasonable. We must reflect on the fact that the overall increase in the lifetime allowance—or the movement to a lifetime allowance—has increased the amount of tax-free savings that people with a particular type of pension can enter into. Even before the Government decided to increase the previously proposed lifetime limit of £1.4 million, the Institute for Fiscal Studies said in its analysis of the proposals that the limits
''are set at such high levels that anybody who is constrained by them would be unlikely to be considered to be underproviding for their retirement.''
 That is something of an understatement. 
 I welcome the fact that the Government have listened to the debate. As we said earlier, whether or not the number of people involved is small, it is right that we should consider whether the tax system deals with them fairly. The Government have made a sensible concession. I am not sure that I would want them to go any further, given my earlier criticisms of the fact that tax reliefs are already generously skewed in favour of people on upper incomes. The challenge is not to make tax reliefs for that group more generous, but to consider how to distribute those advantages further down the income scale. 
 I should like to touch on the more profound question of whether the lifetime limit is the right approach at all. Setting the limit in such a way prompts the question of whether people's liability to pay the additional rate of tax or clawback will increase dramatically as a consequence of the performance of 
 their funds and the assets therein. The Institute for Fiscal Studies paper on the Government's tax proposals says that 
''for individuals with pension funds that are approaching the proposed lifetime fund limit, this limit and the associated recovery charge would distort investment decisions towards lower-risk, lower-expected-return assets. A simple cap on the size of the tax-free lump sum would remove this distortion. Again, the government should consider whether this change would have any undesirable consequences not considered here.''
 The institute points out that, although its proposal would be more costly than the existing Government proposals, which I would not want, it would be possible to deal with the problem by adjusting the proposed level of the tax-free lump sum. The Government should consider that, whether or not it is difficult to do. They should consider it particularly in the context of tax proposals providing more generous tax relief for most people contributing to pension funds than at present. 
 The amendment is sensible. We welcome the concession on the lifetime limit, but we question whether the lifetime limit approach will prove to be popular, or enduring in the long term.

Rob Marris: I found the hon. Member for Tatton's remarks interesting, particularly when he referred to schemes in the state—I think that they are called 401 schemes, but he can correct me if I am wrong—with certain tax advantages if everyone in the company is on the same scheme.
 I pay tribute to Britain's largest independent brewer, Wolverhampton and Dudley Breweries, which is located in my constituency. It has such a scheme, albeit closed to new members. It is a final salary scheme, where the equivalent of payroll put in is 25 per cent., in addition to which the employer pays 7 per cent and it has been able to maintain a fine final salary scheme on that basis. 
 The hon. Member for Tatton's remarks are based on two fallacies. The first is that tax relief encourages saving for retirement. I asked the Department for Work and Pensions what evidence there was that tax relief encourages saving for retirement, but there is precious little such evidence. It may affect the vehicle in which those who have money save—they will use a pension vehicle because of the tax relief—but it does not affect their savings. The main determinant of whether people save for retirement is whether they can afford to do so. Crudely speaking, the poor do not save for their retirement because they cannot afford to do so.

Michael Jack: Just for the record, can the hon. Gentleman remind us of the legal definition of pension?

Rob Marris: The definition is scattered throughout this Bill and previous Finance Bills. It involves savings vehicles—whether they are money purchase or final salary schemes—that have certain tax reliefs attached to the contributions made to the savings vehicles and the accumulation of assets within those vehicles. They are tightly regulated, and their hallmark is those tax reliefs.

Michael Jack: I am surprised that the hon. Gentleman, with his keen legal mind, did not refer to the Barber
 judgment, which defined pensions in European terms as pay postponed. It is important that the money is not taxed twice, going in and coming out.

Rob Marris: I will be guided by you, Sir John. I could go into the Coloroll judgment and all such things as well, but I think that you would say that we were straying too far from the amendments and too far even from a clause stand part debate. I will gladly discuss it with the right hon. Gentleman outside if he wishes. I would do it now, if you would give me the latitude, Sir John, but from the shaking of your head I take it that you would not allow it.
 Secondly, the hon. Member for Tatton's said words to the effect—he will forgive me and correct me if I paraphrase him wrongly—that the super-wealthy would find alternative ways to save for their retirement if the cap were maintained, but that others would not do so. I think that that is a fallacy. Those who have the kind of assets to which he referred would find vehicles, if there are such vehicles, to get around such restrictions.

Michael Jack: Just so that I can understand the hon. Gentleman's remarks with greater clarity, would he be kind enough to tell me what his personal boundaries are between normal, wealthy and super-wealthy?

Rob Marris: The right hon. Gentleman may have noticed that I was quoting the word used by the hon. Member for Tatton. If the right hon. Gentleman can find the opportunity to ask his hon. Friend what he meant by super-wealthy, that will provide him with greater clarity. However, I am putting it forward as a philosophical point, partly to underline the implication of what the right hon. Gentleman said. The category of super-wealthy is a bit vague, but inasmuch as it exists why should those individuals be able to find alternative vehicles, as suggested by the hon. Member for Tatton, but not other wealthy but not super-wealthy individuals?

George Osborne: The phrase ''super-wealthy'' was used by my constituent and by the hon. Gentleman. It was not actually used by me.

Rob Marris: The clear implication of the hon. Gentleman when he read the quote and commented on it was that he, too, was adopting that phrase. If he now resiles from that, perhaps he should tell the Committee.
Mr. Osborne indicated dissent.

Rob Marris: I see the hon. Gentleman shaking his head, but that is the second fallacy.
 The third point, which the hon. Gentleman understandably sidestepped because he represents, by purchasing power, the richest constituency in the UK—someone has to represent those individuals, and it is no surprise to some of us that it is the able, but Conservative, hon. Gentleman—is that 10 per cent. of earners get 50 per cent. of the tax relief on those savings and pensions. 
 The annual figure for tax revenue on pension savings forgone by the Government because of the concessions to which I referred is £14 billion a year. 
 That is incredibly regressive when one considers that 10 per cent. of earners are getting, in one sense, a £7 billion a year handout from the Government—I say in one sense because it is forgone tax revenue—but the hon. Member for Tatton seems to want to increase that figure further. On that basis, if nothing else, I urge my hon. Friends to vote against his amendment.

Quentin Davies: My hon. Friend the Member for Tatton made a most able speech and analysed the situation extremely well, but I shall go a little further than he did.
 My hon. Friend raised the possibility that, instead of introducing the proposed lifetime limit, the Government should go over to the American ERISA—Employee Retirement Income Security Act—system, under which a condition of having a tax-favoured pension scheme is that all employees should benefit from it. I hoped that he would go a little further than he did and commit the Opposition to adopting that policy when we come back to power—which, I hope, will be quite soon—because nothing would be more effective in restoring defined benefit pension schemes in this country. 
 Defined benefit occupational schemes have suffered the most terrible devastation since the Government took office in 1997. They used to be the pride of our pension system. Occupational pension schemes gradually expanded over 50 years but, over the past seven years, one after another has suddenly been wound up. Almost all of them are now closed to new members, although a minority are still open. That is a terrible reversal in the space of just a few years, which blights the retirement prospects of millions of our citizens. The younger generation will find it extraordinarily difficult ever to benefit from a defined benefit occupational scheme. 
 I shall go no further into the damage that the Government have done. There is no question but that reversing it will be difficult, and we need to think long and hard about how we might do so. My suggestion would reverse the damage, because it would create an enormous incentive on management not to close off such schemes to new entrants, as is happening, because they would lose the tax benefits of the scheme for themselves. That would make a substantial difference to the way in which matters are viewed. I hope that my hon. Friend the Member for Tatton will carefully consider that. We have the lesson of the US is in front of us; it is always reassuring when one is legislating to see that one is not jumping into the unknown, but basing one's legislative proposals on experience in comparable circumstances in another country or economy. 
 The Government's proposals for a lifetime limit will have some perverse effects. The IFS has already been referred to. I have not seen its work on this subject. It may well say the same as I am about to say, as, I think, does everyone who has thought about it carefully. I am not sure that the Government have thought about it carefully—indeed, my hon. Friend made it clear that they have been in complete confusion about the £1.4 million and subsequent £1.5 million limit—but anyone who does will see that considerable perversities 
 will flow from the Government's adoption of that mechanism. 
 One concerns the savings ratio, which is far too low in this country; it is about half what it was in 1997. Naturally, it is traditionally higher the more people earn—the higher their earnings, the more they save. However, it will collapse among people at the top of the income scale, who will no longer have an incentive to save in pensions funds, as no tax benefit from saving will be available to them with the limiting of other tax-sheltered savings schemes by the Government—personal equity plans and tax-exempt special savings accounts and so forth will not apply beyond very low limits. There will almost certainly be a situation in which those—perhaps only a few thousand or hundred thousand people—who might be expected to save a considerable portion of their total income will no longer do so. They will simply spend whatever they earn beyond a minimal point. That could have a considerable effect on aggregate savings ratios, as those people are relatively rather wealthy. I do not complain especially about that effect, but we must take it into account. It will be a natural consequence of the Government's measures.

Rob Marris: The hon. Gentleman indicates that there is a problem with the savings rate being relatively low. If that is the case, why is money so cheap?

Quentin Davies: The hon. Gentleman does not entirely understand how such things work. Short-term interest rates are set by the central banking system, in our case by the Monetary Policy Committee of the Bank of England. That is what has caused interest rates to be what he calls cheap, by which I think he means that they are excessively low. I need hardly remind him that private savings are only one element of the aggregate savings in the economy. There are also two major agents, the corporate sector and the Government. The Government are substantially dissaving—in other words, borrowing substantial amounts of money. Against a background of low and falling saving by the domestic sector and rising borrowing by the Government and the corporate sector, which is saving a certain amount but cannot meet the pressure from the Government, it will not be surprising if long-term interest rates are found to be under upward pressure.

Rob Marris: Will the hon. Gentleman give way?

Quentin Davies: The hon. Gentleman cannot really want me to pursue the matter now. There will be other opportunities to discuss technical aspects of savings and monetary policy. I do not think that I would have your indulgence for long, Sir John, if I continued to do it now. I must move back to the impact on savings of the Government's proposed lifetime limit.
 Another obvious perverse effect is that, when individuals see the total aggregate value of their pension investments approaching £1.5 million, they will have considerable incentive not to allow that limit to be breached. The risk-reward ratio that normally affects investors will be substantially changed. Normally, investors consider that it is worth taking a certain amount of risk with their money. If the 
 investment proves to be successful, there will be a return and, if it is high risk, there is, of course, a chance of losing it. Investors balance the two. Now they will say to themselves, ''If I make a risky investment and I lose it, I lose it, but if it is successful, I will lose it as well, because I will go through the £1.5 million glass ceiling.'' As a result, people in that situation will not make risky investments. Far from investing in venture capital and such things, they will not even want to make equity investments. They will go in for cash or near-cash fixed-interest instruments of that kind. 
 Another aspect of a normal, healthy saving system is that those who are relatively wealthy provide a disproportionate amount of the risk capital required by the economy. It is enormously valuable to the economy as a whole that people are prepared to take considerable risks. However, none of us would responsibly advise people on low incomes with small savings and modest prospects for their retirement income to undertake such risks. It would be utterly irresponsible to put widows and orphans into venture capital or something of that sort, but it is important for somebody to go into venture capital. 
 The Government have produced a system under which, against a worrying background of falling aggregate savings, they will ensure that nobody has an incentive—or that those who do have a much reduced incentive—to go into the higher-risk end of the investment spectrum. That cannot be rational. It would have a disproportionately damaging effect economically. 
 I do not know whether the Government took such things into account when they came up with their half-baked proposals, but it is clear from what my hon. Friend the Member for Tatton said about the failure to consult the Government Actuary's Department that an enormous amount of work that should have been done was not, and that everything was careless and slapdash. I am afraid that some of the other relevant considerations were not properly taken into account.

Stephen Pound: Many of us who could not claim to be experts in the field are learning a considerable amount from the erudition of the hon. Gentleman. He will be familiar with column 571 of the Hansard report of the debate on clause 194, in which the hon. Member for Tatton severely, and rather cruelly, chided and criticised him for failing to move amendment No. 113, and went on to say that there would be a two-hour gap in the schedule because of his absence. I have found many of the comments of the hon. Member for Grantham and Stamford (Mr. Davies) to be so helpful and educational that, were he to feel the need to fill the two-hour gap, I, for one, would not object.

Quentin Davies: The hon. Gentleman is very kind—at least, I think that he is being kind. My hon. Friend the Member for Tatton has not drawn my attention to the remarks that he made in my absence. I do not spend my free time simply reading Hansard and it happens that I have not come across those comments. No doubt I shall now have to give way to my hon. Friend.

George Osborne: Clearly, the hon. Member for Ealing, North (Mr. Pound) has put the worst possible construction on what I said, which was merely that one of my hon. Friend's amendments was selected for debate on Tuesday, but he was not here to move it. I merely said that we should therefore have more time to discuss other things. To suggest, as the hon. Member for Ealing, North did, that that was an attack on my hon. Friend is rubbish.

John Butterfill: Order. This is all very amusing and lightens our proceedings, but I think that we are in danger of straying rather a long way from the amendment.

Quentin Davies: Thank you, Sir John. I think that the hon. Member for Ealing, North is understandably trying to create bad blood between me and my hon. Friend the Member for Tatton, but he will not succeed.
 It seems to me that, before I return to the important matter before the Committee, I should apologise for not being here on Tuesday. I knew for some time that I would not be here on Tuesday, but I did not know that my amendment would be reached, because the entire schedule of the Committee's work was changed last week, much to my surprise. We did not keep to the schedule that I expected when I tabled the amendment. However, I understand from other sources that the Government are favourably inclined to action in the context of my amendment, and I hope that that is true and that my effort was not entirely wasted. I am sure that the Committee was able to use the time usefully. 
 I should draw the Committee's attention to another perverse effect; this affects more than the thousands or tens of thousands of people who may be in danger of going through the lifetime limit of £1.5 million. An oblique reference has already been made this morning to the fact that, in so far as those who may have relatively high salaries and who therefore may be in danger of going through the limit may be members of a defined benefit occupational scheme and may have some influence over its investment policy, clearly, in the present circumstances, for the same reason that I gave in relation to personal pensions, that influence would be in favour of the scheme running no risks, rather than making an effort to make a capital gain. 
 Capital gain would just result in the imposition of a tax penalty on the individuals with slightly higher wealth. Therefore, that section of the members of such a scheme would favour its adopting a very low-risk strategy and investing in cash or near cash assets. That might be very bad for the economy as a whole and for those scheme members who should, given their position, salary, age and other characteristics, benefit from a scheme that did have a considerable equity element. I see great difficulties there. 
 One thing that has not appeared in any public comment I have seen is an explanation of why the Government went down that particular route, rather than the obvious one of limiting contributions, perhaps on a lifetime basis. I hope that we will hear why from the Financial Secretary when she addresses the Committee. There is considerable danger and 
 clumsiness in respect of the present annual basis, and I am happy that the Government have rethought it. 
 If one has a lifetime limit at all, why not place it on contributions? If people succeed in making good investments, which is good for them and good for the economy, good luck to them. They have taken the risk, so let them enjoy the benefit. The rest of society will certainly enjoy the benefit of people being prepared to put capital with tax protection and tax advantages into high-risk investments. One still has the equity element and the reductions, or at least the constraints, on the total tax loss—the opportunity cost—of the pension system to the Treasury, because one still has the annual limit on contributions. It seems such an obvious way forward. 
 Can we have a reasoned explanation why the Government have not gone down that route? I can hardly believe that even this Government did not think along those lines before they took what may have been the wrong decision.

Michael Jack: My hon. Friend the Member for Tatton made an excellent case for amendment. When he said that he thought that a less than transparent process had been used to determine the £1.5 million lifetime allowance and other matters connected with its calculation, the body language of the Financial Secretary indicated that she felt that it was entirely transparent.
 Will the Financial Secretary put on record exactly how the limit was put forward? I suspect that the Government may not immediately agree with the amendment. If she is not totally persuaded by his eloquent argument, I ask her to spell out in detail why the amendment is not acceptable. 
 In even greater detail, I would be interested to know if the Financial Secretary prays in aid cost as an argument for the measure. What is the net cost of the tax relief contained within the pension proposals before us? I mentioned the Barber judgment to the hon. Member for Wolverhampton, South-West because pensions are effectively pay postponed, as far as I understand it and as defined by the judgment. There is a logic that, if one puts money into a fund, one postpones the taxation on it by virtue of the relief that one receives, only to offer up the income that is therein generated by the fund for subsequent taxation. 
 There is a difference between the amount of money at one point, to pick up the point made by hon. Member for Wolverhampton, South-West about tax foregone, and the amount of tax that is subsequently brought in from taxation on pension fund income. If there is a difference between the two, it is the net cost of relief on pensions. 
 We have not discussed the net cost. For the sake of clarity, I would be grateful if the Financial Secretary, if not now then later in writing to the Committee, advised us about the net costs of the proposals. It is very easy for Treasury Ministers to pray in aid very large numbers in arguing against relief such as that in the amendment, but the net cost of relief on pensions may well be a lower number.

Rob Marris: It is extremely difficult for the Treasury to come up with that figure because of the long time
 frame between when contributions are put in tax free, and when the money is taken out. The best estimate that the Department for Work and Pensions has been able to provide the Select Committee on which I sit is that the cost of tax relief is £14 billion a year and that the additional tax brought in down the line is about £8 billion. So the net annual cost is £6 billion.

Michael Jack: I am grateful to the hon. Gentleman. He speaks with authority and knowledge on the matter. He has set a precedent that the Financial Secretary should follow, because she is even better informed about those matters than he is, or at least she should be.
 I conclude my remarks by saying that I support the line that my hon. Friend the Member for Tatton took. I look forward to the points of clarification when the Financial Secretary responds.

Howard Flight: Pension saving is self-evidently a long-term activity. It is important that, when changes are made, substantial notice is given to the generation whom those changes will affect and that changes should not dishonour the basis on which people have been saving. When the Conservative Government last changed the rules—bringing in the cap on earnings—people were, rightly and properly, grandfathered, as long as they stayed in schemes that were previously not capped.
 I accept that, in the main, the boundaries set in the reforms disadvantage only a modest number of people. However, I believe that the intention of the original committee brought together by the Inland Revenue was that the principle should be that the boundaries were at least neutral for everyone. I object to the argument, ''It doesn't matter about 10,000. It affects a load of fat cats.'' The issue of principle is that the rules affecting people's saving process should not be changed partway through that saving process to those people's detriment.

Rob Marris: Will the hon. Gentleman remind the Committee whether he supported the previous Conservative Government's gradual abolition of mortgage interest relief at source?

Howard Flight: First, as the hon. Gentleman is well aware, mortgage interest is an entirely different matter. It is not about saving for old age. Secondly, I accept the point in principle. No Government, whatever their complexity, should change the tax rules in relation to people's long-term commitments lightly or wantonly. There is an underlying point of principle. That is particularly important in the area of saving for old age. Whether or not taxation is an incentive, it can become an extreme disincentive if the rules keep changing for people. They will end up saying, ''Why bother? We don't know where we are.''
 The narrow point that I make is that the Government have been close to a regime that does not disadvantage anybody. What was the justification for deciding, while tidying up, to take no notice of what was an established principle?

Ruth Kelly: We have had an absolutely fascinating debate so far. I was delighted that one Opposition
 Member at least professed himself content—even happy—with the basic thrust of the proposals.

David Laws: I do not want the Financial Secretary to misrepresent what I said. I am sure that she will not. I said that I thought that the change to the lifetime limit was appropriate and that I was happy with it. However, I question the fundamental approach of the lifetime limit. That is different from the impression that she is giving.

Ruth Kelly: I shall discuss the principle of the lifetime limit. What I meant to say was that the hon. Gentleman considered it fair that, given that there was going to be a lifetime limit, that limit be set at £1.5 million.
 Despite his eloquence, I was extremely disappointed by the contribution made by the hon. Member for Tatton. Indeed, throughout the debate—until relatively recently—we have heard about contributions from several sections of society and several individuals that completely misrepresented the underlying nature of the proposals.

George Osborne: Is one of those people the Government Actuary?

Ruth Kelly: I shall come on to discuss the role of the Government Actuary in due course. Because of the extensive misrepresentation of the arguments, we thought it wise to ask the National Audit Office to confirm that our estimate of the number of people likely to be affected by a lifetime allowance was reasonable. I have the report in front of me. Far from saying that it is unreasonable, it says that 5,000 people is reasonable, if perhaps at the lower end of the reasonable range. Our estimate is vindicated. Compare that with the figure of 600,000 that was quoted in the press. The NAO's best estimate was about 10,000, but ours was reasonable, and if the hon. Member for Tatton disputes that, I encourage him to stand up and to make his point.
 The NAO told us that the evidential base for the estimate of 1,000 people a year exceeding the allowance was completely reasonable, subject to a degree of uncertainty, as such estimates always are. In fact, it could not come up with a better estimate.

George Osborne: What the NAO said was that
''The evidential base for the estimate of 1,000 additional people a year with funds exceeding the allowance is thin and based on a number of assumptions and roundings which significantly affect the outcome.''

Ruth Kelly: But the NAO has no evidence to say that 1,000 is not a reasonable estimate. It says that the evidential basis is thin. We have to make assumptions about the behavioural impact of changes. However, it is a reasonable estimate of the effect of the proposals.
 The hon. Gentleman mentions particular groups—for instance, pilots and the judiciary—that might be disproportionately affected by the proposals. I agree that those groups are singled out by the report. It says: 
''Two occupations in particular were brought to our attention—the judiciary and airline pilots. Between them they appear to have several hundred people who could be affected due to the specific circumstances of these professions.''
 Since the NAO report was published—and before, indeed—we have met representatives of the airline 
 pilots' union, BALPA, and explained the proposals to them in depth. It is clear that only a minority will be near to, or over the lifetime allowance. The majority of those are already subject to the earnings cap. A few pilots with high salaries and low retirement ages are affected but, as in other industries, all existing rights will be protected under our regime.

Rob Marris: Did my hon. Friend notice that the hon. Member for Tatton mentioned head teachers? I do not know about the toffs at Eton, but for head teachers to be affected—taking the £75,000 that a 20 to 1 ratio would produce on a £1.5 million fund—a head teacher on a half pension would have to be earning £150,000 a year. I defy the hon. Member for Tatton or anybody else to find more than two head teachers in the state sector in the United Kingdom who earn £150,000 a year.

Ruth Kelly: My hon. Friend chooses his own way to describe the people likely to be affected by the proposals. However, I believe that our estimate has been vindicated by the NAO report. In the run-up to the publication of the report, after we had commissioned the NAO to carry out the research, the vocal resistance to our proposals melted away. People realised that the NAO was likely to come up with a conclusion that was similar to ours, because ours was reasonable and based on common sense, and was more likely to be correct than the 600,000 that had been widely quoted in the press before that.

Quentin Davies: The Financial Secretary mentioned pilots with an early retirement age. Does that not highlight one of the great weaknesses of her proposal? Even if we accept the lifetime limit approach—a case can be made for it—is it not absurd that the same limit should apply irrespective of age? Are we not creating a major disincentive for people to stay longer in employment before taking their pensions? A limit of £1.5 million at 60 is not the same as a £1.5 million limit at 70. One should give people an incentive to stay in work for as long as possible. That will be good for them and the community, and they will benefit from the fact that their pension fund is accumulating in the meantime. If one prevents a person's pension from accumulating, or penalises them for allowing it to accumulate, one destroys an incentive that, in other contexts, the Government are trying to do something about.

Ruth Kelly: I was going to deal slightly later with the hon. Gentleman's points, which follow on from his earlier contribution. Before I do, however, I want to make a number of other points.
 First, the 55 per cent. exit charge on those who go over the lifetime limit is not penal. Following consultation, we reduced the rate, and it has been widely welcomed as fair by the industry. Secondly, we are not preventing people from making alternative retirement provisions, but simply saying that such provisions will not be subject to the generous tax reliefs that we provide for income in retirement. Thirdly, people who build up a full lifetime limit will be perfectly able to enter into income draw-down arrangements and to draw down an income from that 
 larger lump sum without it yet again being tested against the lifetime limit. 
 There are very few reasons why someone would be unable to take maximum advantage of such arrangements and why they would be prevented from continuing to work for as long as they liked. In fact, the proposals give far more flexibility to the 14 million or 15 million people who are currently subject to limits that prevent them from taking flexible retirement. Indeed, the proposals open up flexible retirement to the vast majority of people for the first time.

Quentin Davies: With respect to the hon. Lady, she may have missed my point. Let us not have a semantic argument about whether 55 per cent. is penal—it is 15 per cent. higher than the top rate of tax. My point was that, if it is in society's interests for people to stay in work longer—I believe that the Government recognise that in other contexts—people must surely be given an incentive to do so. However, the Bill clearly gives them a disincentive to do so, because 55 per cent. is much higher than 40 per cent., and higher than the effective rate of tax. The Government have therefore made it less rather than more attractive for people to stay in work and to accumulate a larger pension fund. If people work for longer, they should have the reward of a greater income in retirement because they will be enjoying that income for fewer years.

Ruth Kelly: The hon. Gentleman seems to have missed the point that flexible retirement is impossible under the current arrangements and that it is being opened up to the vast majority of ordinary people for the first time. To put the numbers in context, let us use the example of someone who builds up a pension pot of £1.5 million. Someone who contributes £20,000 in the most recent year would have to have made equivalent, real-terms contributions for 31 years to reach the lifetime limit. We are talking about very few people, at the margins.
 Of course, Government policy is to encourage people to actively age—[Interruption.] My right hon. Friend the Paymaster General points out that I should have said, ''to age actively''. We want people to stay in employment for longer. That is partly because we think that they should have that choice, and we are now making that possible for the first time. However, we also want the vast majority of people to have the opportunity to save for longer, because they may not be providing adequately for retirement. I think that it stretches the point to say that people who are at, or close to, the £1.5 million limit have not saved adequately for their retirement. We trade that possibility off against far greater flexibility for the 15 million people who do not benefit under the current pension tax regime. 
 I move on to the point about the transparency of the process. I have been involved in the pension simplification process throughout my three years as a Minister. I have had endless meetings with officials and, more widely, with individuals and representatives of groups outside this place. The hon. Member for Tatton is very keen on his letter from the Government 
 Actuary's Department, but I should tell him what the correct position is. In 2003, the simplification team met representatives from the Government Actuary's Department, including Grant Ballantine, to discuss every aspect of the proposal. Indeed, once the consultation proposals were published, we received responses from them and they had the opportunity to comment in the normal way, as one would expect. I wonder what else the hon. Gentleman would anticipate or expect from a Government.

George Osborne: The Financial Secretary paints a rosy picture of relations between her officials and the Government Actuary's Department. Why does she think that Government actuaries wrote in letters to Opposition Members that
''the Inland Revenue did not consult the Government Actuary's Department about the lifetime limit''?
 They also said: 
''On the basis of the slightly revised Inland Revenue Simplification paper . . . it would appear that the Inland Revenue have given no weight to any of the points we made.''

Ruth Kelly: Clearly, we formed a view as a Government. However, I have produced evidence to the hon. Gentleman and said on the record that we discussed the simplification proposals with the Government Actuary's Department. It is at liberty to make the points it wishes and I would not like to comment or to speculate on the motivation behind that. Clearly, Treasury Ministers are responsible for making such decisions. I made a lot of those decisions, subject to views expressed to me from different quarters.

Rob Marris: Does my hon. Friend agree that the quotation read out by the hon. Member for Tatton is contradictory? It says that no consultation took place, but then it says that the points that were made were not taken into account.

Ruth Kelly: My hon. Friend makes his point very well.
 PricewaterhouseCoopers, whom the hon. Member for Tatton cited at least once during his contribution, described our consultation as a model consultation. The way in which we consulted and listened to representation was widely welcomed throughout the industry.

George Osborne: To clear up the point made by the hon. Member for Wolverhampton, South-West (Rob Marris), the Government Actuary's Department had to take part in the public consultation, after which its views were not listened to.

Ruth Kelly: No.

George Osborne: The Financial Secretary says no. The letter I have is from the Government Actuary, Chris Daykin. It says:
''I would like to be absolutely clear that GAD was not involved in any way in advising on the figure of £1.4 million.''
 We are talking about not some outside organisation, but a Government Department.

Ruth Kelly: In fact, the Government Actuary's Department, as I am sure the hon. Gentleman is well aware, operates on a relatively commercial basis and the Government take advice from it as and when they
 wish. The Government Actuary's Department was consulted and the matter was discussed with it in November 2003, as I have outlined.

Quentin Davies: I wonder whether the Financial Secretary will tell us, as she took the decisions, whether she saw fit to speak to the Government Actuary during her consideration of the decisions.

Ruth Kelly: I listened to all the representations that were made to me. I met a wide variety of people. I considered written representations from some people. I met others personally. As I said, the simplification team met with the Government Actuary's Department, and it had an opportunity to make any representations that it wished. While the report went to the National Audit Office to allow it to verify our estimates—or not—I attended several consultation meetings. I met several people and the pensions simplification team held a variety of consultation meetings. During the ones I attended, there was not a single voice in the entire room—I am talking about meetings where 50 or 60 people were present—against the lifetime limit, once it was confirmed that we were to be given an independent view by the National Audit Office.
 Of course, certain individuals and groups still hold a different view, but the virtually unanimous consensus was that implementing the limit was the right thing to do. It was made clear to me in writing, in person, in every way possible, that we must press ahead with our reforms, and that a huge opportunity would be lost were we not to do that. When the NAO report came back, which vindicated our research, we decided, having listened to the views expressed during the consultation, to defer implementation for a year until 2006 in response to representations from the industry that it needed more time to implement the changes. 
 At that time, we also decided to uprate £1.4 million to £1.5 million to take account of inflation between the initial announcement in 2004 and implementation in 2006. We listened to representations maintaining that certain people were worried about the planning horizon and whether there would be sufficient certainty about what the limit would rise to in future years. Because there was that worry, we decided to set out in the explanatory notes, as the hon. Member for Tatton said, precisely what we intend the lifetime limit to rise to over the next five years. As a result of the package, we listened to representations on how that limit would be reviewed. People asked us to review it on a five-yearly basis and that is what we have pledged to do. 
 The hon. Gentleman suggests that we did not listen to the consultation, but the opposite is true. From memory, I can tell him some of the points that we listened to. People talked to us about whether the exit charge was penal; we reduced the exit charge significantly in response to the representations. They suggested that we should have a single valuation factor of 20 to 1; we brought that in. They suggested that, if people went over the lifetime allowance, they ought to be able to take a lump sum subject to an exit charge; we brought that in. We listened on a wide variety of issues. In fact, we could not have been more responsive 
 to the issues that were raised with us by individuals and representative organisations. 
 Several hon. Members, including the hon. Member for Yeovil (Mr. Laws), made some philosophical points about the concept of the lifetime limit. Let me deal with one suggestion that might have some inherent, intuitive attractiveness: we should not test the overall pension pot when it is drawn down subject to a lifetime limit, but should instead have a test that works against annual contributions. That would mean that annual contributions could be made up to a certain limit, be it £1 million, £1.5 million or whatever the Government decided. Although a contributions limit has certain attractive features, it would not be simple to administer. It is an extremely difficult issue—I see the hon. Member for Arundel and South Downs (Mr. Flight) nodding in agreement. 
 To make a contributions limit workable, one would have to stop the tax relief at the point at which the limit was reached. How could that be achieved? It might be possible for an individual who has one long-term pension scheme and one employer, but it immediately starts to get very complicated if the individual switches schemes or employers. How would the new scheme or the new employer know the amount of contributions that had been made in respect of an individual up until that point? As soon as one starts to consider an individual with several concurrent employers or schemes, it becomes as good as impossible to keep track of the cumulative contributions. 
 There is another possible variant on that scheme: all the separate contributions could be added up and tested right at the end, subject to a lifetime limit on contributions. Presumably, there would be some exit charge if a certain limit were exceeded. However, even that system would be very difficult to implement. When one considers transfers of rights, DB schemes, and unfunded and non-contributory schemes, one can see that the calculation would either be extremely difficult to achieve, or allow great opportunities for avoidance in the system. It would also mean keeping records for a lifetime. In choosing a lifetime limit on the overall size of the pot, we have struck a reasonable balance between a fair system and one that can be easily administered. It allows full flexibility for 99 per cent. of the population. 
 The hon. Member for Tatton and others drew attention to the US scheme. The CBI has made representations on the subject and said that, if all members of a scheme were treated on the same basis, there should be no lifetime limit whatever. I notice, however, that the hon. Gentleman did not read out the letter published in the Financial Times from Tony Reardon, the pensions consultant. He questioned that view and said that the proposals could lead to far more administration to track individuals as they moved between schemes. Having some capped schemes and some uncapped schemes would, he argued, in no way lead to simplification. We have chosen a simple system that is easier to administer, delivers maximum 
 flexibility for 99 per cent. of the population and treats the top 1 per cent. fairly. 
 We said in our consultation, however, that we remain interested in the 401K schemes in the United States. We shall continue to look at the operation of those schemes and schemes in other countries, always seeking to improve our system. We are of course always interested in schemes that would lead to increased take-up of pensions and savings. We rule nothing in or out for the future. 
 The hon. Member for Tatton argued that a lifetime limit would lead to highly paid executives leaving their company pension schemes and seeking alternative pension arrangements. That argument was put to me several times when we first put the proposals out for consultation, but since then almost no one has done so. It has become clear to most people that it is in everyone's interests to accumulate the £1.5 million under their lifetime limit, even if individuals then seek alternative pension arrangements. The proposals could, in fact, encourage far more people to join their company pension scheme than the reverse. I do not agree with the representations that have been made. 
 The right hon. Member for Fylde (Mr. Jack) talked about the net cost of our proposals. We have published a regulatory impact assessment, which includes those costs. The net costs of our proposals as published are £25 million for 2006–07, £70 million for 2007–08 and £165 million for 2008–09. Our scheme is not only flexible for the vast majority of people, but much more generous for many millions of people. We have debated that with the hon. Member for Yeovil. The scheme is generous, flexible and fair. However, I ought to discuss the amendment.

Rob Marris: Does my hon. Friend agree that, since the hon. Member for Tatton is, I think, 33 or 34 and has not declared an interest in this debate, he clearly does not anticipate going as far in politics as some have suggested he might?

Ruth Kelly: Of course, we all aspire to be in the top 1 per cent. [Interruption.] In fact, I correct myself—in some ideal world, perhaps everyone would qualify. Millions of people, ourselves included, are highly unlikely ever to face that situation.
 The hon. Member for Tatton asked for the precise amounts to be set out in the Bill. We have made those commitments publicly. They are in the explanatory notes and there is no reason whatever why they should be set out in the Bill. He made a slightly more substantive point about whether the level of the lifetime allowance ought to be increased by the amount to which the individual would be entitled under a state earnings-related pension scheme, or the state second pension, had he or she not entered into a contracted-out arrangement. 
 The underlying argument does not stand up to scrutiny. The intention is for the lifetime allowance to be measured against pension funds benefiting from tax privileges, which is precisely what contracted-out pensions are. In the new regime, not only will such pensions benefit from tax-free member contributions, but employer contributions will be free from tax and 
 national insurance. In addition, there is provision for tax-free investment growth. 
 Individuals and employers will also benefit, as they do now, from the lower rate of national insurance contributions that contracted-out schemes attract. The lower rate means that the tax position of individuals who contract out has already been put on a par with those who do not. Those who do not contract out receive their benefits later, in the form of the state second pension. Those who contract out benefit from lower national insurance contributions. The lower rate benefits not only those individuals who are fortunate enough to have pensions savings in excess of the lifetime allowance, but the vast majority of individuals who do not. Therefore, perhaps the logical consequence of giving people who contract out a higher lifetime allowance would be to charge them the same rate of national insurance as everyone else. That, of course, would disadvantage the vast majority of people in contracted-out schemes to benefit just a few. 
 The amendments of the hon. Member for Tatton do not stand up to scrutiny. We have had a stand part debate and our proposals have been widely welcomed as bold and radical. They will benefit millions of ordinary people, so I ask the hon. Gentleman to withdraw his amendment.

George Osborne: I think that we all actively aged during the debate, but it was perhaps the best debate that we have had on the clauses on pension expectation. I want to make some brief points, because I know that we want to get on.
 First, the Financial Secretary said that the Treasury's estimate was vindicated by the NAO, which is an extraordinary reading of the NAO's report and not the same conclusion reached by anyone else who read the report. The NAO found that the Government were 100 per cent. wrong in their estimate and that is not my definition of being vindicated. 
 By the way, the NAO did not rubbish the estimates made by companies such as Mercer Human Resource Consulting Ltd., but said in paragraph 97 of its report: 
''The alternative calculation examined—suggesting 100,00 and 600,000 people would be affected—are reasonable but different ways of estimating the number of people affected''.
 The NAO did not rubbish the estimates in the way suggested by the Financial Secretary. 
 I am grateful to my hon. Friend the Member for Grantham and Stamford (Mr. Davies), who made some telling points about the collapse of defined benefit schemes, the perverse incentive which may result as a consequence of the lifetime allowance, the possible move away from, for example, venture capital and equities for wealthy people and the importance for the economy of money from wealthy people in venture capital and so on. He recommended that we accept as official Opposition policy something like the scheme put forward in the United States. If he has not already done so, he should read the article that my hon. Friend 
 the Member for Havant (Mr. Willetts) wrote in the Financial Times on 7 January, which sets out many of the attractions of the scheme. While one should not read that as a complete commitment to its introduction, it points to the direction of future Opposition policy. The Financial Secretary did not rule it out in her comments and said, interestingly, that the Government are continuing to look at that US scheme. It is interesting to have that on the record. 
 During the debate about the Government Actuary's Department, the intervention of my hon. Friend the Member for Grantham and Stamford revealed that the Financial Secretary did not meet the Government Actuary. It is striking that the correspondence, particularly that from the Government Actuary, makes it absolutely clear that the Government Actuary's Department was not consulted in any way when the proposals were drawn up and was forced to act like an outside organisation and make a written submission to the consultation, which seems a strange way in which to treat a Government Department.

Quentin Davies: I wonder whether my hon. Friend can imagine, if he were doing the Financial Secretary's job—I certainly cannot—making a decision on a new, far-reaching pension arrangement such as this without consulting the Government Actuary. Surely, the first official to consult is the expert in Government who, above all, would have something to contribute to the discussion.

George Osborne: My hon. Friend makes a powerful point. I would, of course, have consulted the Government Actuary. It is the thought of being the Financial Secretary that keeps one going in this job. Thankfully, as the hon. Member for Wolverhampton, South-West pointed out, I have many years to get there, not that I shall need them because things are going so well.

John Burnett: Such are the hon. Gentleman's ambitions, has he considered whether there will be a valuation of the fund and a surcharge payable should he become, say, Prime Minister?

John Butterfill: Order. I would be grateful if the hon. Gentleman did not respond to that question.

George Osborne: Do not worry, Sir John, I shall not respond to it.
 I shall make just two final points, as I suspect that Ministers want to leave for Treasury questions in the House. First, the Financial Secretary said that there is no reason why the increases for the next four years should be included in the Bill. However, there is no reason why they should not be included. They should be in the Bill, not in the explanatory notes. Secondly, I did not buy any of her arguments about the state second pension. There are tax privileges associated with having a state second pension, just as there are with contracting out of it, and the lifetime allowance would be eroded. She did not adequately address those points, so we may have to return to them on Report. I shall have to press my amendment to a Division. 
 Question put, That the amendment be made:—
The Committee divided: Ayes 7, Noes 12.

Question accordingly negatived. 
 Further consideration adjourned.—[Jim Fitzpatrick.] 
 Adjourned accordingly at seven minutes past Eleven o'clock till this day at half-past Two o'clock.